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However, we view today's dour sentiment as an additional positive factor helping boost stocks in 2012, as even moderately better-than-expected outcomes should result in an upside surprise. And in our view, there's ample room for upside surprise.

Overall, economic fundamentals are stronger than many appreciate. The following are just a few factors highlighting underappreciated economic strength.

Corporate Earnings and Sales Growth

U.S. firms reported year-over-year operating earnings growth for the eighth consecutive quarter in the third quarter of 2011. Corporate profits are now at all-time highs, and expectations are for continued growth in 2012 -- firms are lean, healthy and growing. Preliminary fourth-quarter data shows, of the 461
S&P 500 companies that had reported earnings as of Feb. 24, 63% beat expectations and 10% met expectations. Aggregate earnings-per-share growth is estimated at 9.4% year over year -- and should it hold, would mark the ninth straight quarter of overall earnings growth.

While earnings growth can be a result of cost-cutting measures, as is common in the early stages of an economic recovery, we are well past that now. Year-over-year revenue also grew for the eighth consecutive quarter in Q3 2011, reflecting rising demand and a healthy business environment. For the 454 firms reporting Q4 revenue through Feb. 24, aggregate revenue-per-share growth is estimated at 7% year over year, according to
Thomson Reuters. Firms are bringing in money just fine.

Further, corporate profits per employee are up 140% since the Q4 2008 trough. For those fearing a new recession, recessions historically tend to happen in environments of falling corporate profits per employee (not rising) as businesses lose sales faster than they can cut workers. (See the chart below.)

U.S. Corporate Profits Per Employee

Source: Thomson Reuters, US Bureau of Economic Analysis, as of 09/30/2011

Leading Economic Indicator Index

The Conference Board's
Leading Economic Indicator index continues to rise. The index derives its value from 10 key variables, including employment data, spending results, manufacturing and consumer sentiment. In the last 50 years, a recession (as indicated by the gray areas in the chart below) has never closely followed a rising LEI trend.